The IRS recently published new guidance on the tax withholding and reporting consequences associated with qualified retirement plan distributions to state unclaimed property funds.  In Revenue Ruling 2020-24, the IRS clarified that distributions from qualified retirement plans to state unclaimed property funds are subject to both federal income tax withholding and 1099-R reporting requirements.  In a companion revenue procedure, Rev. Proc. 2020-46, the IRS permitted taxpayers to self-certify for a waiver of the 60-day deadline for rolling over funds between qualified plans when the funds had been distributed to a state unclaimed property fund.

Revenue Ruling 2020-24

Rev. Rul. 2020-24 addresses an employer-sponsored qualified retirement plan which distributed a participant’s $900 accrued benefit to a state unclaimed property fund.  (See earlier Inside Compensation articles discussing benefits of missing participants.)  The IRS ruled that section 3405 requires the employer, who is the plan administrator under the facts of the ruling, to withhold federal income tax on the distribution.  Moreover, the plan administrator is required to report the distribution on Form 1099-R under section 6047. The IRS’s analysis in the ruling is consistent with the approach the IRS took in Rev. Rul. 2018-17, which ruled that the escheatment of amounts from an IRA or qualified annuity to a state unclaimed property fund was subject to withholding under section 3405 and Form 1099-R reporting. That ruling took effect this year.

In general, distributions from qualified plans are subject to withholding under section 3405.  The amount required to be withheld differs depending upon whether the distribution is a periodic or nonperiodic distribution, and whether the distribution is an eligible rollover distribution.  On the question of income tax withholding, the IRS considered the exemptions from withholding under section 3405 and determined that none of those exemptions applied.  In particular, the IRS concluded that, under the facts of the ruling, it would not be reasonable for the employer to conclude that the distribution to a state unclaimed property fund was not includible in the participant’s gross income.  Thus, the employer was required to withhold income tax from the deferred compensation distribution to the unclaimed property fund.

Additionally, because the distribution exceeded $10, the IRS ruled that Section 6047(d) and the 2020 instructions to Form 1099-R require the plan administrator to report to the IRS and the participant the total distribution as income to the participant and the amount of federal income tax withheld on Form 1099-R.

Transition Relief

The IRS provided transitional relief, giving qualified retirement plans until the earlier of January 1, 2022, or the date it becomes reasonably practicable to comport their withholding and reporting procedures with the requirements of this ruling.  Plan administrators who make distributions from qualified plans to state unclaimed property funds should review their procedures to ensure that income taxes are withheld and distributions are properly reported under this new guidance.  Plan administrators should not wait for 2022 to implement the guidance.  To avoid potential penalties, steps should be taken to implement the required withholding and reporting as soon as practicable.

Rev. Proc. 2020-46

To avoid income inclusion from an indirect rollover from a qualified plan or IRA (i.e., a distributed to a participant which the participant deposits into an IRA), taxpayers generally must complete the rollover within 60 days after the distribution.  However, the Treasury Secretary may waive this requirement when failure to do so would be “against equity or good conscience.”  Prior to 2016, a taxpayer generally requested a private letter ruling to waive the 60-day requirement.  In Rev. Proc. 2016-47, the IRS developed a new procedure permitting taxpayers to self-certify to the recipient plan or IRA that the requirements for a waiver of the 60-day rollover deadline were satisfied.  The self-certification procedure is available only under certain circumstances, such as an error by the financial institution, severe damage to the taxpayer’s personal residence, postal error, or the death of a family member, among others.  The self-certifying taxpayer is required to complete the rollover as soon as is practicable after the reason preventing completion of the rollover is resolved.

Rev. Proc. 2020-46 adds “the distribution was made to a state unclaimed property fund” to the list of permissible reasons taxpayers may cite in support of a waiver of the 60-day deadline.  Plan administrators and IRA trustees may rely on the taxpayer’s self-certification in accepting the rollover, so long as they do not have actual knowledge contrary to the self-certification.  The taxpayer should retain a copy of the self-certification, which is subject to verification by the IRS during a later examination.  It should be noted that the distribution must still be otherwise eligible for rollover treatment; the waiver only applies to the 60-day deadline.  The revenue procedure also provides model language to be used for waiver self-certification.

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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Michael advises…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Michael advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Michael advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Michael counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Michael is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.

Photo of Julie Edmond Julie Edmond

Julie Edmond is senior counsel in the employee benefits practice. She has extensive experience counseling and litigating in the employee benefits area, including traditional defined benefit, cash balance, 401(k), profit-sharing and ESOPs; executive compensation and § 409A; § 403(b) plans, § 457 plans…

Julie Edmond is senior counsel in the employee benefits practice. She has extensive experience counseling and litigating in the employee benefits area, including traditional defined benefit, cash balance, 401(k), profit-sharing and ESOPs; executive compensation and § 409A; § 403(b) plans, § 457 plans and other plans for tax-exempt organizations; and medical plans (including health reform), cafeteria plans, VEBAs and other welfare plans.  Her experience includes plan selection, formulation and drafting, regulatory compliance, audits, voluntary compliance, prohibited transactions and fiduciary duty requirements, separate line of business issues, use and handling of employee benefits and benefit plans in corporate transactions, and ERISA litigation.